Question

Keekemo's Place
Keekemo's Place contains a number of electronic games as well as a miniature golf course and
various rides located outside of the building. The owner would like to construct a water slide on
the property. The following information has been gathered:
a. Water slide equipment could be purchased and installed at a cost of $330,000. It is estimated
that the slide could be used for 12 years after which it could be sold for $10,000.
b. To make room for the water slide, several rides would have to be dismantled and sold. Cost
to dismantle the rides is $28,000. These rides can be sold for a nearby amusement park
for $60,000.
c. The owner expects about 50,000 more people would use the water slide each year than have
been using the rides. The admission price would be $3.60 per person, and would increase 15%
every two years.
d. It is estimated that the annual operating costs for the water slide would be: salaries $85,000,
insurance $4,200, utilities $13,000, and maintenance $9,800. These operating costs are expected
to increase at a rate of 6% per year.
The owner will not accept new projects unless they return 20% annually.
Required:
1. Name the techniques you will use to evaluate this proposal.
2. Perform your analysis. Describe the information provided by each of the techniques you use.
3. Should the slide be purchased? Why or why not?

Answer 1

Answer no 1-

Techniques used to evaluate this proposal would be Cash Flow basis.

Answer no 2- Performance of analysis.

Year	Capital expenses			Sales	Salaries	Insurance	Utilities	maintainance	Net revenue	Net Capital Employeed	Net returns	Average returns
	Slide Equipment cost	Dismental	Sale Proceeds	Extra revenue tickits sale	Operating Expenses
1	-3,30,000	-28,000	60,000	1,80,000	85,000	4,200	13,000	9,800	68,000	4,18,000	16%	25%
2				1,80,000	90,100	4,452	13,780	10,388	61,280	418000	15%
3				2,07,000	95,506	4,719	14,607	11,011	81,157	418000	19%
4				2,07,000	1,01,236	5,002	15,483	11,672	73,606	418000	18%
5				2,38,050	1,07,311	5,302	16,412	12,372	96,653	418000	23%
6				2,38,050	1,13,749	5,621	17,397	13,115	88,169	418000	21%
7				2,73,758	1,20,574	5,958	18,441	13,901	1,14,883	418000	27%
8				2,73,758	1,27,809	6,315	19,547	14,736	1,05,351	418000	25%
9				3,14,821	1,35,477	6,694	20,720	15,620	1,36,310	418000	33%
10				3,14,821	1,43,606	7,096	21,963	16,557	1,25,599	418000	30%
11				3,62,044	1,52,222	7,522	23,281	17,550	1,61,469	418000	39%
12	10,000			3,62,044	1,61,355	7,973	24,678	18,603	1,59,435	418000	38%

Average returns are been over and above requirement of 20%.

Answer no 3-

Yes the slide should be purchased as the average revenues are over and above basic requirement of 20% returns from 5th year onwards revenue is streamlined to over and above 20%.

If its not purchased additional profit of 5% over and above exprected returns would be lost.